Bitcoins – good as gold or good for nothing?

What is a Bitcoin? Some investors may have heard the term Bitcoin, but I’d bet that most haven’t. A Bitcoin is a digital currency used by very few people through the Internet for purchases and trading. It’s the world’s largest alternative currency, traded mainly by ‘geeks’ and those who want to get away with things online. Bitcoins can be exchanged through a computer for goods locally or internationally, without a financial institution in between blocking certain trades or monitoring who the funds are sent to. Without a centralised bank or reserve to control and influence the…

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What is a Bitcoin? Some investors may have heard the term Bitcoin, but I’d bet that most haven’t.

A Bitcoin is a digital currency used by very few people through the Internet for purchases and trading. It’s the world’s largest alternative currency, traded mainly by ‘geeks’ and those who want to get away with things online.

Bitcoins can be exchanged through a computer for goods locally or internationally, without a financial institution in between blocking certain trades or monitoring who the funds are sent to. Without a centralised bank or reserve to control and influence the Bitcoin, many of them end up used by those the rest of the world chooses not to trade with.

Similar to opening an account through a bank, all a user has to do is visit Bitinstant and convert a local currency into the virtual money. The currency is traded just like any other, with the most popular exchange being Mt.Gox. Sounds too easy, right? In order to trade via a bank transfer you need to “link” your bank accounts using the login details associated with said bank account. That’s a risk I’m not taking.

Recently the Bitcoin has come to many investors’ attention. According to Alan Safahi, the CEO of Bitcoin processor Zip Zap, “There is a little bit of a bubble. I’m not happy about prices going up as fast as they have.” On March 3rd a Bitcoin sold for $34, a month later it was worth $147.

How does it work?

Bitcoins are encrypted by anonymous programmers throughout the world and confirmed by you when you purchase them through hashed ECDSA digital signatures. Data miners, which are servers, dedicated to the production of Bitcoins create on average around 25 new Bitcoins every 10-minute period.

However, the supply of Bitcoins is limited and they will stop being created during 2140. The current value of all Bitcoins is around $800 million dollars, not very big considering the trillions that get traded every day on stock exchanges. However, with the recent fall of gold (and gold shares) many have looked for other means of safely storing their wealth. According to CNBC’s Jeff Cox, when Cyprus started suffering its financial crisis, the alternative currency, “previously little more than a curiosity” began to become extremely enticing to those looking to avoid the turmoil and as a result, has “zoomed in trading value since”.

Foolish takeaway

Some are praising Bitcoins as the next gold, but it would be wise not to fall for that. Give it some time before you go rushing to exchange your hard-earned money for some Bitcoins.

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Owen Raszkiewicz does not own shares in any of the mentioned companies.

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